Indirect taxation of trust
Recent jurisprudential contributions in the field of trusts require us to carry out a further analysis of the fiscal discipline applicable to that institution, in the light of the consolidated orientation, which seems to have contributed to an epochal change of direction compared to the past, opening up a more incentive tax regime.
As we know, the trust is an institution aimed at creating an asset entity consisting of a set of legal relationships established by an entity (the settlor), by creating a destination restriction on certain assets, which are placed under the control of a trustee in the interest of a beneficiary or for a specific purpose.
It follows that the effect that is intended to be achieved through the establishment of the trust is to produce a segregation of assets, so that the assets conferred in trust give rise to a distinct asset, separate from the residual assets of the settlor, the beneficiaries and the trustee.
The trust comes into existence as a result of two distinct legal activities: the first one which is the founding act, that is to say the unilateral act by which the settlor appoints the trustee, lays down the programme and rules for the pursuit of a specific purpose and designates the beneficiaries or the rules for identifying them. The second activity, instead, provides for the execution of the so-called endowment acts, consisting of acts of transfer of assets and rights from the settlor to the trustee.
The above mentioned activities represent different moments and have different nature. In fact, the founding act does not have a patrimonial character, otherwise, all the endowment acts determine a patrimonial allocation. However, the trust also has a further category of acts, also having a patrimonial character, which are aimed at determining the final allocation of wealth to the beneficiaries, therefore.
It can be seen from these premises that tax issues are only highlighted with reference to acts having a patrimonial character, because only then the taxable event, that justified the tax levy, takes place.
As anticipated, 2019 marked a time of renewal, since the Court of Cassation has given a categorical change to its original interpretation of the indirect taxation of endowment acts, no longer considering them as a manifestation of contributory capacity.
In this respect, it should be noted that over the years the case law has come to not unequivocal conclusions regarding the tax treatment applicable to the abovementioned acts.
More specifically, it is discussed what the taxation regime of the act was and whether taxation should take place from the outset, therefore with the transfer of the assets from the settlor to the trustee, or only at the time of the asset allocation from the trust fund to the beneficiary.
In consideration of the above, it should be noted that the most controversial issue on this subject concerns the correct application of gift and inheritance tax, reintroduced pursuant to art. 2 par. 47 D.L. 262/2006, which extended the scope of its application also to the constitution of destination restrictions of assets and rights, including the trust.
Indeed, the interest the jurisprudence (as well as the practice) has shown in clarifying the meaning of this provision has given rise to three distinct trends in interpretation, including the one that emerged following a series of rulings issued during 2019.
A first orientation, more restrictive, adhering to a strict literal interpretation of the rule, considered the endowment act of the trust as a case characterized by the automatic application of gift and inheritance tax. This strand, in fact, establishes that art. 2 par. 47 D.L. 262/2006 indicates, as a precondition for taxation, the mere establishment of a destination restriction, not requiring that the taxation of the transaction remains subject to the transfer of the asset to the final beneficiary.
In this sense, Court of Cassation 3735/2015, Cass. 3737/2015, pointed out that the regulation in question is connoted by the presence of special application requirements if it operates within the trust. In fact, the above mentioned judgments highlight that the tax is instituted not on the transfer of goods and rights deriving from the constitution of destination restriction, as, instead, happens for successions and donations, in relation to which the causal link is expressly evoked, but directly, and in itself, on the destination restriction. Therefore, the tax assumption is related to the preparation of the program for the functionalisation of the right to pursue the objectives desired by the settler, even in the absence of an immediate and concrete translation effect. In this way, it is considered an expression of contributory capacity, not the enrichment of assets to the advantage of a given person, but only the segregation effect resulting from the contribution of assets to a trust. From this it follows that the tax authorities can demand the withdrawal from the establishment of the trust and for any type of trust. In the face of this approach, which appears to be a minority one, there is another, intermediate one, which considers that gift and inheritance tax is applicable where the establishment of the trust has a translational effect, therefore, leading to a transfer of assets for the benefit of a final beneficiary. However, in accordance with this approach, it is argued that the tax in question should be paid, not necessarily when the assets of the trust are transferred to the beneficiaries but also, in some cases, at the time of the endowment act through which the settlor transfers these assets to the trustee, but on condition that from the outset it is possible to assess that the settlor had the effective will to carry out, even through the trustee, a transfer of the rights in favour of the third party. This opens the possibility of providing for a taxation at the time of the transfer of assets to the trust and not necessarily at the time of final allocation to the beneficiary (in this sense, Cass. 734/2019). This orientation, as a consequence of the above, excludes the application of inheritance and gift tax in cases of self-declared trusts, since the latter does not transfer any assets and rights to third parties.
In different terms from the two orientations described, a third emerged (Cass. 29642/2019, Cass. 1699/2019). This one has been reflected in the most recent jurisprudential elaborations, which considers an actual transfer of wealth with a stable asset allocation necessary for taxation purposes. As a result, gift and inheritance tax will only be payable if the final beneficiary receives the assets. This orientation leads to the conclusion that the endowment act itself is not to be considered relevant for tax purposes since it does not, in any case, produce a real transfer effect, even when the transfer of assets in favour of beneficiaries is predictable from the outset but it is not yet taken place. The Supreme Court of Cassation, in conclusion, considered the contribution of assets to a trust as a non-taxable case since it is a neutral act not capable of carrying out a transfer of wealth susceptible to taxation, since it does not fulfil any taxing prerequisite. In fact, the endowment acts do not increase the assets in favour of the trustee, who assumes the ownership of the asset but only in function of the implementation of the program established by the settlor, since the tax assumption must be considered fulfilled only with the possible attribution of the asset to the beneficiary.
Despite the favourable position taken by the most recent case law, the issue of the tax rules applicable to trusts continues to present wide areas of shadow and uncertainty, given the complexity of the matter under consideration. The trust, in fact, for the distinct connotations that it can assume leads to make it impossible to define a unitary tax regime, having to reconstruct the tax case from time to time.
In this regard, the position taken by case law, which led to the exclusion of indirect taxation at the endowment act, is hopefully also confirmed by the tax authorities, in order to make the whole framework compatible with the fundamental principles of legal certainty and regulatory clarity in order to allow greater transparency in economic and financial relations.
Author: Mario Manfredi